11.     Derivative Instruments and Hedging Activities

Interest Rate Risk Management

The Company previously engaged in an interest rate hedging strategy for which the hedged transactions were the forecasted interest payments on the Credit Facility. The hedged risk was the variability of forecasted interest rate cash flows, where the hedging strategy involved the purchase of interest rate swaps. These interest rate swaps expired in July 2013 and the Company has not entered into new interest swap arrangements as of December 31, 2014.

Foreign Currency Instruments

The Company also designates certain foreign currency derivatives, primarily comprised of foreign currency forward contracts, as freestanding derivatives for which hedge accounting does not apply. The changes in the fair market value of these freestanding derivatives are included in selling, general and administrative expenses in the Company’s consolidated statements of income. The Company uses freestanding foreign currency derivatives to hedge foreign-currency-denominated intercompany transactions and to partially mitigate the impact of foreign currency fluctuations. The fair value of the freestanding foreign currency derivatives is based on third-party quotes. The Company’s foreign currency derivative contracts are generally executed on a monthly basis.

The Company designates as cash-flow hedges those foreign currency forward contracts it enters into to hedge forecasted inventory purchases and intercompany management fees that are subject to foreign currency exposures. Forward contracts are used to hedge forecasted inventory purchases over specific months. Changes in the fair value of these forward contracts, excluding forward points, designated as cash-flow hedges are recorded as a component of accumulated other comprehensive income (loss) within shareholders’ (deficit) equity, and are recognized in cost of sales in the consolidated statement of income during the period which approximates the time the hedged inventory is sold. The Company also hedges forecasted intercompany management fees over specific months. These contracts allow the Company to sell Euros in exchange for U.S. dollars at specified contract rates. Changes in the fair value of these forward contracts designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) within shareholders’ (deficit) equity, and are recognized in selling, general and administrative expenses in the consolidated statement of income during the period when the hedged item and underlying transaction affect earnings.

As of December 31, 2014 and December 31, 2013, the aggregate notional amounts of all foreign currency contracts outstanding designated as cash flow hedges were approximately $225.3 million and $244.7 million, respectively. At December 31, 2014, these outstanding contracts were expected to mature over the next twelve months. The Company’s derivative financial instruments are recorded on the consolidated balance sheet at fair value based on third-party quotes. As of December 31, 2014, the Company recorded assets at fair value of $12.3 million and liabilities at fair value of $1.6 million relating to all outstanding foreign currency contracts designated as cash-flow hedges. As of December 31, 2013, the Company recorded assets at fair value of $5.7 million and liabilities at fair value of $4.4 million relating to all outstanding foreign currency contracts designated as cash-flow hedges. The Company assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly. During the years ended December 31, 2014, and 2013, the ineffective portion relating to these hedges was immaterial and the hedges remained effective as of December 31, 2014, and December 31, 2013.

As of December 31, 2014 and December 31, 2013, the majority of the Company’s outstanding foreign currency forward contracts had maturity dates of less than twelve months with the majority of freestanding derivatives expiring within two and three months as of December 31, 2014 and December 31, 2013, respectively.

 

The table below describes all foreign currency forward contracts that were outstanding as of December 31, 2014 and December 31, 2013:

 

Foreign Currency		Average Contract Rate				Original Notional Amount				Fair Value Gain (Loss)
						(In millions)				(In millions)
At December 31, 2014
Buy Chinese yuan dollar sell Euro			7.72			$	8.0			$	0.2
Buy Euro sell Australian dollar			1.51				4.9				(0.1	)
Buy Euro sell Chilean peso			745.65				1.1				—
Buy Euro sell Indonesian rupiah			15,302.91				1.8				—
Buy Euro sell Mexican peso			18.04				153.3				(0.4	)
Buy Euro sell Malaysian ringgit			4.31				0.7				—
Buy Euro sell Peruvian nuevo sol			3.66				4.0				—
Buy Euro sell Philippine peso			55.39				1.7				—
Buy Euro sell Russian ruble			69.82				2.7				0.1
Buy Euro sell U.S. dollar			1.23				105.0				(2.0	)
Buy British pound sell Euro			0.80				2.3				—
Buy Russian ruble sell Euro			49.80				2.8				(1.0	)
Buy U.S. dollar sell Brazilian real			2.54				10.4				0.9
Buy U.S. dollar sell Colombian peso			2,084.12				4.8				0.6
Buy U.S. dollar sell Euro			1.32				132.6				10.7
Buy U.S. dollar sell South Korean won			1,081.96				7.7				0.1
Total forward contracts						$	443.8			$	9.1

 

Foreign Currency		Average Contract Rate				Original Notional Amount				Fair Value Gain (Loss)
						(In millions)				(In millions)
At December 31, 2013
Buy Australian dollar sell Euro			1.55			$	2.7			$	—
Buy Euro sell Australian dollar			1.52				4.5				0.1
Buy Euro sell Chilean peso			727.40				1.1				—
Buy Euro sell British pound			0.83				2.5				—
Buy Euro sell Indonesian rupiah			16,915.00				0.7				—
Buy Euro sell Mexican peso			17.51				150.3				4.9
Buy Euro sell Russian ruble			45.05				3.0				—
Buy Euro sell Singapore dollar			1.74				3.0				—
Buy Euro sell U.S. dollar			1.37				161.3				—
Buy British pound sell Euro			1.01				4.9				0.1
Buy Japanese yen sell U.S. dollar			104.71				2.9				—
Buy Malaysian ringgit sell U.S. dollar			3.30				5.3				—
Buy Singapore dollar sell Euro			1.71				2.0				—
Buy New Taiwan dollar sell U.S. dollar			29.54				14.9				(0.1	)
Buy U.S. dollar sell Brazilian real			2.35				12.8				0.6
Buy U.S. dollar sell Euro			1.34				171.8				(4.2	)
Buy U.S. dollar sell South Korean won			1,112.65				50.0				1.5
Total forward contracts						$	593.7			$	2.9

 

The following tables summarize the derivative activity during the years ended December 31, 2014, 2013, and 2012 relating to all the Company’s derivatives.

Gains and Losses on Derivative Instruments

The following table summarizes gains (losses) relating to derivative instruments recorded in other comprehensive income (loss) during the years ended December 31, 2014, 2013, and 2012:

 

 

		Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) For the Year Ended
		December 31, 2014				December 31, 2013				December 31, 2012
		(In millions)
Derivatives designated as hedging instruments:
Foreign exchange currency contracts relating to inventory and intercompany management fee hedges		$	16.8			$	3.5			$	(3.3	)
Interest rate swaps			—				—			$	(0.6	)

As of December 31, 2014, the estimated amount of existing net gains related to cash flow hedges recorded in accumulated other comprehensive income (loss) that are expected to be reclassified into earnings over the next twelve months was $13.5 million.

The following table summarizes gains (losses) relating to derivative instruments recorded to income during the years ended December 31, 2014, 2013, and 2012:

 

		Amount of Gain (Loss) Recognized in Income For the Year Ended												Location of Gain (Loss) Recognized in Income
		December 31, 2014				December 31, 2013				December 31, 2012
		(In millions)
Derivatives designated as hedging instruments:
Foreign exchange currency contracts relating to inventory hedges and intercompany management fee hedges(1)		$	(4.6	)		$	(5.2	)		$	(1.8	)		Selling, general and administrative expenses
Derivatives not designated as hedging instruments:
Foreign exchange currency contracts		$	(26.2	)		$	6.4			$	(10.0	)		Selling, general and administrative expenses

 

(1)	For foreign exchange contracts designated as hedging instruments, the amounts recognized in income (loss) primarily represent the amounts excluded from the assessment of hedge effectiveness. There were no material ineffective amounts reported for derivatives designated as hedging instruments.

 

The following table summarizes gains (losses) relating to derivative instruments reclassified from accumulated other comprehensive loss into income during the years ended December 31, 2014, 2013, and 2012:

 

		Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income												Location of Gain (Loss) Reclassified from Accumulated  Other Comprehensive Loss into Income (effective portion)
		For the Year Ended
		December 31, 2014				December 31, 2013				December 31, 2012
		(In millions)
Derivatives designated as hedging instruments:
Foreign exchange currency contracts relating to inventory hedges		$	4.0			$	(4.1	)		$	0.1			Cost of sales
Foreign exchange currency contracts relating to intercompany management fee hedges			—			$	(0.7	)		$	4.5			Selling, general and administrative expenses
Interest rate contracts			—			$	(2.0	)		$	(3.6	)		Interest expense, net

The Company reports its derivatives at fair value as either assets or liabilities within its consolidated balance sheet. See Note 13, Fair Value Measurements, for information on derivative fair values and their consolidated balance sheet location as of December 31, 2014 and 2013.